Have you ever wanted to dump a large quantity of your portfolio at once? Probably many of us have, whether we are daytrading swings or just getting rid of a part of an investment. While heading to a cryptocurrency exchange, you open up the market and start unloading... only to realize that the orderbook is thin. What does it mean? Basically it means there are not enough buy orders to buy all the amount you want to unload at the current price and unloading all at once would mean moving the market significantly. which also reduces your profitability.
Unfortunately, there's not much you can do, if you are trading on an exchange with a rare instrument or perhaps the whole exchange just has poor liquidity and very little interest. As a regular trader, you can move to another exchange that supports the instrument in question and see if the orderbook looks better there or take the bitter pill and dump what you can.
Some instruments and some exchanges never really pick up massive intrest and die a slow death, without ever getting enough interest to grow.
credz: pixabay.com
What if you are an institutional trader and face the same problem? You want to move thousands of Bitcoins yet you cannot just sell or buy randomly on an exchange, not if you want to create another Mt.Gox style pressure on the market (This is a reference to the weird market behaviour, where the market suddenly, for short periods of times, becomes under immense pressure and dumps from the most random locations, yet in an orderly fashion - probably because someone is unloading massive amounts of Bitcoins).
As an institutional trader, you want to stay out of this nasty business, until you are ensured better conditions. You want to buy or sell without creating a shitstorm. Until that happens, an institutional trader might take his business elsewhere.
Now, crytocurrency exchanges are becoming aware. As the exchange with more trading volumes wins (more volumes, more profit. More volumes, more traders, more profit. Slice it how you want. More profit), they have started various incentive programs for large traders, for example massive fee cuts for trade operations.
A market maker on a cryptoexchange should offer liquitidy for trader that do not have an immediate counterparty, ie if one would want to buy a boatload of certain currency without there being not enough sell orders on the market, a market maker / liquidity provider will answer that call.
Here we come to the second incentive - block trades. Block trading is a simple term, that describes fixing the process that I described in the beginning of the post, but it's usually limited only to large traders. Some exchanges, Coinbase and our favourite twins' the Winklevii Gemini already offer blockt rades for large traders.
Essentially it means the massive orders put by large customers are executed off an exchange's main order book and won't reflect on the market until filled, at least partially. The customer sets the intrument, quantity and his desired price and the exchanges work their magic to pair the order up with counterparties.
credz: pixabay.com
While directly not affecting small traders, this is a large step to lure high-stakes investors, institutions and banks to cryptocurrency trading. And as the liquidity picks up, cryptocurrency markets are one step closer to maturity and larger adoption.
Materials (some are behind pay-walls):
businessinsider.com
coindesk.com
businessinsider.com
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